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Chapter 8 - Accommodation

Proposed change

A number of amendments are proposed to clarify the boundaries of the definitions of “dwelling” and “commercial dwelling”.

8.1 Accommodation provided by registered persons is taxable for GST purposes unless it is supplied in a residential “dwelling”. In such cases the supply is an exempt supply.

8.2 The term “dwelling” excludes a “commercial dwelling”. Thus, the supply of a “commercial dwelling” by a GST-registered person is normally subject to GST.

8.3 Although a draft interpretation statement released by Inland Revenue in October 2006 attempted to clarify the scope of the two definitions, most submissions received on the interpretation statement commented that, in certain areas, the legislation does not give taxpayers sufficient certainty about when the supply of accommodation should be treated as a taxable or exempt supply. [7]

8.4 To resolve the uncertainty, the officials’ issues paper suggested two options:

  • The first option would involve making relatively minor changes to the current terms “dwelling” and “commercial dwelling”, to provide a clearer indication of the boundary between taxable and exempt accommodation.
  • The second option would involve replacing the current legislative terms with terms that are more descriptive of the normal use of the premises.

8.5 The majority of submissions preferred the first option. Submissions generally considered that a revised framework, as the second option proposed, would replace the current uncertainty with a new layer of ambiguity.

8.6 Several submissions noted specifically that the legislation needs to clarify explicitly the tax treatment of supplies of serviced apartments as there is uncertainty about whether they are taxable or exempt supplies. There was general support for the proposal in the officials’ paper that serviced apartments should be treated as commercial dwellings.

Is the exemption for supplies of accommodation necessary?

8.7 The New Zealand Institute of Chartered Accountants questioned whether the supply of accommodation in a dwelling should be outside the tax base. It submitted that if all accommodation were subject to GST, the boundary issues between exempt and taxable housing would disappear.

8.8 Economically, there is little difference between having rental income in or out of the GST base. Taxing the purchase price of a dwelling (through input tax credit denial) and exempting the rental income derived from it broadly equates to charging GST on the present value of the future rental income and deducting input tax on purchase.

8.9 Bringing rental income into the GST base would, however, cause a new set of problems. The change would increase the compliance costs for owners of rental accommodation who are currently unregistered as many of them would be required to register for GST and comply with GST obligations. The change would also increase Inland Revenue’s administration costs resulting from a sudden and substantial increase in the number of GST-registered persons. (Data indicates that such a reform could introduce about 130,000 new GST-registered persons into the system.)

8.10 Bringing rental income into the tax base would also have a short-term negative effect on the government’s revenue. This would happen because owners of rental accommodation who had not claimed input tax deductions on the purchase of their rental accommodation under the current rules would be able to use the change-in-use adjustment (or apportionment) rules to claim deductions. Considering the large number of taxpayers affected by such a change and the substantial value of land and buildings in the rental market, this revenue cost would be significant.

8.11 Removing the boundary between taxable and exempt supplies of accommodation is therefore not proposed. Instead, a clearer boundary between taxable and exempt accommodation by amending the definitions of “dwelling” and “commercial dwelling” is proposed.

Definition of “dwelling”

8.12 The definition of “dwelling” is intended to include any accommodation that is normally used as a place of residence or the home of a person.

8.13 The reason given in the White Paper, Proposals for the Administration of the Goods and Services Tax, published in March 1985 for leaving residential rentals outside the tax base was to ensure that owner-occupiers of residential dwellings are not placed in an advantageous position compared with those who rent. For this reason, the definition should apply only to situations where there is a reasonable level of substitutability between renting and owning a home. This substitutability is more appropriately based on the use of the accommodation rather than the functional nature of the premises as the current definition may imply.

8.14 The current definition refers to a building that is used predominantly as “a place of residence or abode of any individual”. According to the draft interpretation, which adopted a wide interpretation of “dwelling”, any house can potentially be covered by this definition. The interpretation is concerned with the functional aspects of the building (that is, whether the building’s structure means that it is predominantly suitable as a place of residence or abode) and there is no requirement for any degree of permanency of occupation in order for the building to be held to be a dwelling.

8.15 So, for example, if a person rents out their second home (which might normally be used by the person to reside during summer months) for a few weeks, the supply to the recipient could potentially be treated as a supply of accommodation in a dwelling. This is because the current legislation is concerned with the premises’ predominant function (that is, a place of residence of the person during summer) rather than the purpose for which the premises have been rented out. This outcome is at odds with the policy intent of the definition.

8.16 To overcome this problem, the definition should focus on the use of the accommodation. It is proposed that the definition be amended to apply to supplies of accommodation in dwellings where the person renting the accommodation occupies the building as his or her habitual or principal place of residence. This definition would imply that the nature of a person’s occupation of the premises must be similar to the occupation of what is commonly understood as their “home”.

8.17 To provide further guidance, the definition would also require that the person renting the accommodation must have exclusive possession of the premises. This will ensure that the recipient’s rights to the accommodation closely resemble the rights of owner-occupiers in relation to their homes.

8.18 Under the proposed rule, the supply of the holiday home would not be treated as a supply of accommodation in a dwelling because the house would not be habitually occupied by those renting it as their main residence.

8.19 Defining the term “dwelling” more narrowly is more in line with the broad-based nature of the GST rules and will improve the equivalence of the GST treatment for owner-occupiers and those who rent their homes.

Definition of “commercial dwelling”

8.20 Supplies of accommodation by GST-registered persons are generally taxable unless they are an exempt supply of accommodation in a dwelling. The definition of “commercial dwelling” is however important for a number of reasons. First, it indicates what types of accommodation are potentially eligible for the reduced value attribution rules in section 10(6) under which the value of a commercial dwelling on which GST must be charged may be reduced if the accommodation is supplied along with other goods and services on a long-term basis. Secondly, by describing establishments that are commercial dwellings, the definition removes the establishments from the definition of “dwelling”.

8.21 Submissions on the officials’ paper indicated that there is some uncertainty about whether certain supplies are within the definition of a “commercial dwelling”. To address the concerns, it is proposed to expand the list of types of accommodation that are explicitly included in the definition. These will include homestays, farmstays and bed and breakfast establishments. The suggested additions to the list of types of commercial dwelling should resolve the current uncertainty with the tax treatment of these specific types of accommodation.

8.22 Since it is difficult to identify and specifically mention in the legislation all possible current and future types of accommodation that should be treated as commercial dwellings, it is necessary to have a comprehensive catch-all provision. The current catch-all provision in paragraph (d) of the definition covers any establishment “similar to any of the kinds referred to in paragraphs (a) to (c)”. Questions have arisen about whether this definition is clear enough to indicate what additional types of accommodation could be covered.

8.23 Supplies by GST-registered persons of accommodation that is not accommodation in a “dwelling” should generally be taxable. Therefore, it is proposed to supplement paragraph (d) of the “commercial dwelling” definition with a specific additional catch-all provision that would cover any supplies of accommodation that are not supplies of accommodation in a “dwelling”.

Serviced apartments

8.24 One of the issues raised in submissions was the tax treatment of supplies of accommodation in serviced apartments and units in serviced apartments. It is proposed that, in addition to the supplies mentioned above, supplies of accommodation in serviced apartments in certain cases be treated as supplies in a commercial dwelling and subject to GST if provided by a registered person in the course or furtherance of a taxable activity. Supplies of accommodation in an apartment may have a variety of accompanying features and characteristics, such as the nature of services provided and the degree of management control exercised. It is necessary to identify what combination of features would indicate that the apartment should be regarded as a serviced apartment and therefore a “commercial dwelling”.

8.25 Generally, the type of apartments that should be regarded as “serviced apartments” are those that are managed as part of a wider business of supplying accommodation. Often, these businesses will not own the individual apartments under their management, but will have control over the business decisions relating to the apartments. The proposed legislation would ensure that apartments under a unified management are included in the same definition.

8.26 The factors indicative of a serviced apartment would be that:

  • the apartment is managed by a third-party operator as part of a wider accommodation operation with the operator having control over the management and operational decisions;
  • some degree of service other than just accommodation is provided; and
  • residents do not have the right to exclusive possession of the apartment.

8.27 A supply of accommodation in an apartment that does not meet all of the criteria for being a serviced apartment (because, for example, it is managed directly by the owner) may still be a supply of an accommodation in “commercial dwelling” if it does not meet the definition of “dwelling” as proposed in this chapter. The supply would be subject to GST if it is made by the registered person in the course or furtherance of a taxable activity.


7 GST Exempt Supply: Supply of accommodation in a dwelling, released by Inland Revenue on 19 October 2006.